As dictator of the universe, I would force everyone to read the second part of Will Wilkinson’s essay; the part on why mechanisms generating income inequality, not inequality itself, are what matter. This is mostly because I’m writing a paper on one such mechanism and, hey, publicity!, but also everyone should read it because, well, what Wilkinson says is true.

You like truth, don’t you?

Income inequality is one of those topics that makes smart people dumb. When asked why income inequality matters to him, a once proficient and smart (he’s still smart, no doubt) internet commentator wrote on this blog “I don’t really care why, I just do.” A short-circuit of thought: income inequality is bad, QED.

Inequality matters is incorporated into the very structure of the mind ((This line and the post title are taken from this essay. While the choice might be politic, Wilkinson dwells on correctable mechanisms generating inequality like unequal education, taxes or even norms regarding renumeration of CEOs. We should be prepared to confront innate inequalities, too. )).

Alas, I’m not yet the dictator of the universe. Go read that section (or heck the whole thing) anyway. Its not a nitpick of the empirics. Its not apologetics for the status quo. Its not a tired retread of right-wing talking points. At the very least, read it as the most advanced arguments your ideological opponents can throw at you so you might prepare your own counterarguments.

3 Responses to “No sane human being has ever given his assent”

I think we have to find the mechanisms first. Policy implications will fall out from the mechanism.

The mechanism I’m looking at is an increase in transferability of on the job, task- or product-specific knowledge. Its easier these days for workers to transfer their job-related knowledge from one job to the other. Increasing transferability increases the number of workers that change jobs (because costs of switching are decreased and because the present value of the knowledge gained in the new job increases) and this has two effects. First, it decreases inequality because workers can more easily move to jobs that have become more productive (maybe because of job-specific technological advances). Second, workers lose some knowledge when they switch jobs (knowledge isn’t perfectly transferable) and so it increases dispersion of wages at any given point in time. It turns out over the last couple decades the second effect dominates the first so with increased transferability of knowledge, we’ve seen increased wage inequality. (I’m currently working on quantifying this effect of transferability on inequality.)

This is a sectoral shifts mechanism similar to the one Kuznets proposed to derive his famous curve. I just have a parameter that makes it easier to move sectors (jobs in my model) and the high productivity sector (Kuznets’ cities) changes randomly over time.

Normatively, there’s nothing bad about increasing transferability of knowledge. Personally, I think its a good thing. It feels good to be an expert in something. So the wage inequality caused by it shouldn’t be a concern. The policy implication is that income equalizing policies will retard the efficient allocation of workers across jobs. You can have income transfers but they shouldn’t be correlated with income differences that have to do with transitory differences in job knowledge. My inner technocrat says we should subsidize job switches too, but I don’t think we know enough about the knowledge production function and I’m sure there are perverse side effects (like people switching jobs that shouldn’t).

Also, in the future the first effect may start to dominate the second effect. In this case increased transferability of knowledge will lead to decreasing inequality.